Bank of Canada Holds Interest Rates Steady while Reserving Right for Increases

The December 2017 interest rate decision by the Bank of Canada was to hold steady at a one percent interest rate for the time being. However, the Bank of Canada hinted that it may need to raise interest rates in the future. Governor Poloz said that interest rate changes in 2018 will be data-driven, not prescriptive. Interest rate changes will be made in response to hard data instead of set based on expectations or hopes. And they need to see what happens since exports are softening, while wage growth and inflation remain below the two percent targets. This is despite economic growth being higher than initial estimates because of developing economies’ growth, improved business investment, the economic impact of infrastructure spending early in 2017 showing up in the last quarters’ data, and increasing prices for oil. The risk of NAFTA falling apart or being altered by President Trump’s administration, however, means that continued growth is not guaranteed. The Bank of Montreal’s chief economist said the bank will be patient; this is because they don’t want to guarantee a growth-killing recession by raising interest rates too soon. What does this mean for the Canadian mortgage market? First, mortgage rates are going to remain near today’s historic lows for at least several months, despite the multiple rate hikes in 2017l. However, they are almost guaranteed to start rising later in 2018. So if you want to buy a home, now is the best time to buy and lock in these very low-interest rates. Second, the tighter lending rules that were issued to cool down overheated real estate prices in Vancouver and Toronto are going to weaken the overall real estate market, though it won’t affect Alberta nearly as much as it will the rest of the country. The biggest impact the threat of rate increases poses is the possibility that the stress test borrowers have to pass to get a new mortgage will become harder, pushing out many potential buyers. If you can pass the stress test today but may not qualify for a new mortgage if interest rates go up half a percent, you should talk to a Calgary mortgage broker. You’ll see a decent selection of homes on the market but less competition for these properties. For example, the need to accumulate a much larger down payment will force many potential buyers to wait before they can buy or buy smaller properties than they initially planned. Third, mortgage renewals are going to spike in anticipation of an interest rate increase. Today is the best time to lock in a lower interest rate on your mortgage or refinance your adjustable rate mortgage into a low fixed rate mortgage. Analysts may have pared back their interest rate expectations for 2018, but that means the rates will be going up slowly over the next year. Yet it is almost certain to continue going up once they start going up, due to efforts to slow Canada’s strong economy. This is the price we pay for being the fastest growing economy in the G7, seeing more than three percent growth in the first half of 2017.